Mineral owners in Colorado and Wyoming have been and continue to be approached to lease their oil and gas rights. Often times, the first contact the oil and gas company will have with the mineral owner is through a pre-drafted lease mailed to the mineral owner. Most times these pre-leases strongly favor the oil and gas companies. Mineral owners may be tempted to sign the lease without negotiating, especially with the financial incentive. However, it is important to understand the terms of the lease are negotiable and accepting the first offer may not be in the mineral owner’s best interest.
It is imperative the mineral owner understands the oil and gas lease prior to negotiating or signing. Unfortunately, many of the terms found in these leases are uncommon and may not be understood. The following are simple definitions of some important terms found in oil and gas leases:
- Bonus Payment: this is an up-front payment based upon the number of mineral acres being leased. The per acre bonus payment varies greatly depending on many factors, including whether there is a proven oil and gas deposit in the area.
- Primary Term: this is the initial length of the lease, three to five years is common. During this time the lessee is not required to explore or extract minerals.
- Secondary Term: the duration of the lease is extended past the primary term if a producing well is drilled (or if the lease is pooled with other leases to form a unit). The secondary term expires when production ceases.
- Royalty: This is the mineral owner’s share of the oil and gas produced and is expressed in a fraction.
The above is only a small list of the terminology found in oil and gas leases. We recommend mineral owners contact an experienced attorney if they have questions about the above or any additional terms.
When entering into an oil and gas lease, there are many important issues that should be addressed. One of the most obvious concerns for mineral owners is whether the financial aspects of the offered lease are fair. It can be difficult to ascertain this information and, many times, is extremely beneficial to obtain the advice of an experienced oil and gas attorney on this issue. In addition to the initial bonus payment, the difference between a 1/6 and a 1/8 royalty on a producing well can be substantial. Equally important to many mineral owners is the oil and gas company’s use of the surface. A typical pre-printed oil and gas lease will provide almost unlimited use of the surface to the oil and gas company. This can have serious implications for farmers, ranchers and homeowners. A surface use agreement can clearly define the rights and responsibilities of the oil and gas company, including where drill pads, access roads and pipelines can and cannot be located, exactly what type of reclamation work is required after drilling is complete and what type and the location of fences that must be built. The above is not intended to be an all encompassing list, but to give mineral owners an idea of potential issues when entering into a lease.
An oil and gas lease can extend long past the initial primary term. Therefore, it is important the mineral owner understands exactly what he or she is signing and the potential benefits and risks. A wise investment may include hiring an experienced attorney to help negotiate more favorable lease terms.
Written by Mike Samelson